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The Social Security Trust Fund, the Riskless Interest Rate, and Capital Accumulation

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  • Andrew B. Abel

Abstract

This paper develops a tractable stochastic overlapping generations model to analyze the equilibrium equity premium and growth rate of the capital stock in the presence of a defined-benefit Social Security system. If the Social Security Trust Fund increases the share of its portfolio held in risky capital, the equilibrium equity premium falls in the following period and along a constant growth path. This change in the portfolio of the Social Security Trust Fund will increase the growth rate of capital in the following period, and, if a certain sufficient condition is satisfied, will increase the growth rate of the capital stock along a constant growth path. Calibration of the model indicates that it can match the historical average equity premium and the historical average growth rate of the capital stock using plausible values of the preference parameters. In addition, the sufficient condition for the growth rate of the capital stock to increase along a constant growth path is satisfied. Quantitatively, the effects on the riskless interest rate and the growth rate of capital are small.
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  • Andrew B. Abel, "undated". "The Social Security Trust Fund, the Riskless Interest Rate, and Capital Accumulation," Rodney L. White Center for Financial Research Working Papers 03-99, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:03-99
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    File URL: http://finance.wharton.upenn.edu/%7Erlwctr/papers/9903.pdf
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    References listed on IDEAS

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    Cited by:

    1. Henning Bohn, 2001. "Social Security and Demographic Uncertainty: The Risk-Sharing Properties of Alternative Policies," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 203-246, National Bureau of Economic Research, Inc.
    2. Hongjun Yan, 2008. "Natural Selection in Financial Markets: Does It Work?," Management Science, INFORMS, vol. 54(11), pages 1935-1950, November.
    3. G. M. Constantinides & J. B. Donaldson & R. Mehra, 2005. "Junior must pay: pricing the implicit put in privatizing Social Security," Annals of Finance, Springer, vol. 1(1), pages 1-34, January.
    4. John Sabelhaus, 2005. "Alternative Methods for Projecting Equity Returns: Implications for Evaluating Social Security Reform Proposals," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 8(1), pages 43-63, March.
    5. K. Mc Morrow & W. Röger, 2002. "EU pension reform - An overview of the debate and an empirical assessment of the main policy reform options," European Economy - Economic Papers 2008 - 2015 162, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Oshio, Takashi, 2004. "Social security and trust fund management," Journal of the Japanese and International Economies, Elsevier, vol. 18(4), pages 528-550, December.
    7. Kuznetsov Artem & Ordin Oleg, 2001. "Pension Reform in Russia: A General Equilibrium Approach," EERC Working Paper Series 01-02e, EERC Research Network, Russia and CIS.
    8. Andrew B. Abel, 2001. "The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks," American Economic Review, American Economic Association, vol. 91(1), pages 128-148, March.
    9. Martin Barbie & Marcus Hagedorn & Ashok Kaul, 2006. "Fostering Within-Family Human-Capital Investment: An Intragenerational Insurance Perspective of Social Security," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(4), pages 503-529, December.
    10. Giovanni L. Violante & Orazio P. Attanasio, 2000. "Transición demográfica en economías cerradas y abiertas: historia de dos regiones," Research Department Publications 4195, Inter-American Development Bank, Research Department.
    11. Smetters, Kent, 2006. "Risk sharing across generations without publicly owned equities," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1493-1508, October.
    12. Andrew Ang & Angela Maddaloni, 2005. "Do Demographic Changes Affect Risk Premiums? Evidence from International Data," The Journal of Business, University of Chicago Press, vol. 78(1), pages 341-380, January.
    13. John Y. Campbell & João F. Cocco & Francisco J. Gomes & Pascal J. Maenhout, 2001. "Investing Retirement Wealth: A Life-Cycle Model," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 439-482, National Bureau of Economic Research, Inc.
    14. Simon Grant & John Quiggin, 2002. "The Risk Premium for Equity: Implications for the Proposed Diversification of the Social Security Fund," American Economic Review, American Economic Association, vol. 92(4), pages 1104-1115, September.
    15. Violante, Giovanni L. & Attanasio, Orazio P., 2000. "The Demographic Transition in Closed and Open Economies: A Tale of Two Regions," IDB Publications (Working Papers) 1313, Inter-American Development Bank.
    16. Hongjun Yan, 2008. "Natural Selection in Financial Markets: Does It Work?," Management Science, INFORMS, vol. 54(11), pages 1935-1950, November.
    17. Peter Diamond & John Geanakoplos, 2000. "Social Security Investment in Equities in an Economy with Short-Term Production and Land," Cowles Foundation Discussion Papers 1259, Cowles Foundation for Research in Economics, Yale University.
    18. John Sabelhaus & Joel V. Smith, 2003. "Alternative Methods for Projecting Equity Returns: Implications for Evaluating Social Security Reform Proposals: Technical Paper 2003-08," Working Papers 14678, Congressional Budget Office.
    19. Takashi Oshio, 2004. "Social Security and Trust Fund Management," NBER Working Papers 10444, National Bureau of Economic Research, Inc.
    20. Giovanni L. Violante & Orazio P. Attanasio, 2000. "The Demographic Transition in Closed and Open Economies: A Tale of Two Regions," Research Department Publications 4194, Inter-American Development Bank, Research Department.

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    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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